Elevating Repositioning Costs: Strategy Dynamics and Competitive Interactions

Abstract

Research summary:This article proposes an approach for modeling competitive interactions that incorporates the costs to firms of changing strategy. The costs associated with strategy modifications, which we term "repositioning costs," are particularly relevant to competitive interactions involving major changes to business strategies. Repositioning costs can critically affect competitive dynamics and, consequently, the implications of strategic interaction for strategic choice. While the literature broadly recognizes the importance of such costs, game-theoretic treatments of major strategic change, with very limited exceptions, have not addressed them meaningfully. We advocate greater recognition of repositioning costs and illustrate with two simple models how repositioning costs may facilitate differentiation and affect the value of a firm's capability to reduce repositioning costs through investments in flexibility. Managerial summary:This article illustrates how the decision to make a strategic change is affected by both the cost to the firm of making the various strategy modifications, as well as the cost to its rivals of changing their strategies in response. These "repositioning costs" are important because they shape the responses each competitor would likely make to a move by the other competitor, and should be anticipated when considering an initial change to one's own strategy. The paper shows how repositioning costs can be used strategically to facilitate differentiation, and to assess the value of potential investments in flexibility.

Threat of platform‐owner entry and complementor responses: Evidence from the mobile app market

“…The competition‐driven repositioning literature (e.g., de Figueiredo & Silverman, ; Menon & Yao, ) has highlighted three major factors that could affect a firm's decision on whether to stay in or move away from a market affected by competition: (a) the profitability in the affected market, (b) the profitability in an alternative market, and (c) a firm's strategic flexibility and repositioning costs. Although the competition caused by an entrant reduces the profitability of the affected market, a variety of factors, such as a low level of asset redeployability, domain‐specific proprietary knowledge, and investments in customer and distribution networks in the affected market, could heighten exit barriers and render repositioning too costly (Decker & Mellewigt, ; Harrigan, ; Harrigan, ).…”

Incumbent repositioning with decision biases

“…Ghemawat persuasively argues that a strategic choice is one that involves commitment and that committed choice creates the persistent pattern of action typically characterized as strategy” (Menon & Dennis, , p. 1954). Following this argument, Menon and Dennis () analytically investigate the interaction between an incumbent (innovator) and an entrant (follower). Within their setting, the incumbent develops and introduces a new product generation and then chooses to offer either generous or stingy licensing terms to a follower who can imitate the innovation or become a “complementor.” The follower's choices are modeled as involving possible repositioning costs because the activity systems supporting imitation versus complementarity are different.…”

“…While repositioning can be advantageous, it may come at a cost because past strategic decisions, which often entail prior commitments (Ghemawat, ), may need to be changed. Typical costs associated with repositioning (“repositioning costs”) include investments to overcome within‐firm managerial resistance to change, to rework channel relationships, and to educate (or advertise to) consumers about the new positioning (Menon & Dennis, ). These repositioning costs have substantial implications for the competitive interplay between firms (Ellickson et al, ; Wang & Shaver, , ).…”

“…These repositioning costs have substantial implications for the competitive interplay between firms (Ellickson et al, ; Wang & Shaver, , ). Consider the case of Mobileye (Yoffie, ), a technology leader in vision technologies for advanced driver assistance systems (ADAS), which was highlighted in Menon and Dennis (, p. 1954):

Rather than selling its technologies directly to original equipment manufacturers (OEMs), Mobileye initially partnered with Tier 1 automotive suppliers such as TRW and Autoliv who, in turn, sold the OEMs integrated ADAS using Mobileye and non‐Mobileye vision technologies. Mobileye subsequently instituted an exclusivity policy under which it would only work with Tier 1 suppliers who were not developing (or were no longer developing) non‐Mobileye ADAS.

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Authorship trends and collaboration patterns in business ethics literature

“…To survive in competitive environments, companies consider their stakeholders when formulating and implementing strategies or tactics at operational, business, and corporate levels (Bridoux & Stoelhorst, ; Fassin, de Colle, & Freeman, ; Menon & Yao, ; Prusty, Mohapatra, & Mukherjee, ). While the outcomes of these strategies, tactics, or actions may be good or right for one company, they may be bad or wrong for others (Epstein, Peysakhovich, & Rand, ; Rodrigo, Duran, & Arenas, ; Trevino & Nelson, ).…”